CGL Coverage for Liquidated Damages and the Contractual Liability Exclusion

Liquidated delay damages are common in construction contracts and are generally imposed when a contractor fails to achieve substantial completion within the time required by the contract. While contracts like the AIA A201-2017 have provisions for extending the time to achieve substantial completion when delays are caused by circumstances beyond the contractor’s control, delays can result from factors other than improper management or planning and the like, for which the owner is not required to give the contractor additional time. Courts are split on whether there is ever coverage under a CGL policy for contractually agreed upon liquidated delay damages.  

Liquidated delay damages are often excluded under the contractual liability exclusion of most CGL policies. The contractual liability exclusion excludes coverage for “liability for which the Insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” Courts often find the contractual liability exclusion in a CGL policy precludes coverage for liquidated delay damages, because such damages are contractual in nature and are triggered by the failure to bring the contract to substantial completion by a fixed deadline, regardless of the cause of the delay. However, some courts will look to the cause of the delay and find that there is coverage under a CGL policy for liquidated delay damages that are the result of property damage caused by an accident or occurrence.
 
In Clark Const. Grp., Inc. v. Eagle Amalgamated Serv., Inc., 01-2478-DV, 2005 WL 2092998, at *1 (W.D. Tenn. Aug. 24, 2005) a general contractor entered a contract for the renovation of the convention center in Memphis. Part of the project included the demolition of a structure attached to the convention center. The demolition work was improperly performed by a subcontractor and resulted in damage to the convention center.
 
The city sought to recover the costs of repairing the damage and liquidated delay damages under the contract. The contractor sought defense and indemnity from the subcontractor and its CGL insurers. The insurers contended that they had no duty to indemnify and defend the liquidated damages claim because that claim arose from a breach of the contract, which was specifically excluded by the policy. The court held that the delay damages were covered under the policy, and the exclusion did not apply, because the liquidated damages resulted from property damage that was covered under the policy.
 
In Mattiola Const. Corp. v. Commercial Union Ins. Co., 60 Pa. D. & C.4th 412 (Com. Pl. 2002) the court found coverage for liquidated damages under a CGL policy. In that case, a subcontractor was performing saw cutting on a bridge project when the subcontractor accidently cut a structural member of the bridge. The “accident” caused the stoppage of all work on the project and resulted in the assessment of liquidated damages against the general contractor. The general contractor withheld the liquidated damages from the subcontractor. The subcontractor sought to recover the liquidated damages from its CGL carrier. The CGL carrier refused to pay the subcontractor’s claim, citing, among other provisions, the contractual liability exclusion in the policy.
 
In determining whether the contractual liability exclusion precluded coverage for the liquidated damages, the court applied Pennsylvania’s “gist of the action” test, which looks to whether a tort wrong is the gist of the action, and the contract claims are merely collateral. The court rejected the CGL carrier’s arguments, finding that the gist of the action against the subcontractor was based on the accident and was in tort. The court went on to hold that simply because the amount of the damage owed as a result of that accident was defined by the contract, that fact did not make the damages contractual in nature and, as a result, coverage for the liquidated damages was not precluded by the contractual liability exclusion in the CGL policy.
 
However, other courts have explicitly rejected this approach for determining if there is coverage for liquidated damages resulting from property damage. In O & G Indus., Inc. v. Litchfield Ins. Grp., Inc., No. CV126006448S, 2015 WL 3651786 (Conn. Super. May 15, 2015), the court refused to apply the “gist of the action” test to determine whether liquidated damages were covered under a CGL policy. The court held that the “gist of the action” test would prevent an insurer from having any certainty as to whether a specific contract provision between the insured and third parties would be covered under the policy, because the insurer would have to wait for the event that triggered the delays to know if the delay damages were covered. The court found that the liquidated damages provision in the contract at issue was triggered by the failure to bring the project to substantial completion by a fixed deadline, regardless of the delay, and, as a result, the contractual liability exclusion precluded coverage for liquidated damages.
 
Similarly, in Kvaerner N. Am. Constr. Inc. v. Certain Underwriters at Lloyd's London Subscribing to Policy No. 509/DL486507, 1:15CV210, 2017 WL 2821691, at *1 (N.D.W. Va. June 28, 2017) (applying New York law), the court held that liquidated delay damages were not covered under the CGL policy, even if it was an occurrence of property damage that caused the delay.
 
While the cases are inconsistent, when the delays at issue are the result of property damage that is otherwise covered under the policy, some courts are willing to find coverage under a CGL policy for liquidated delay damages, despite a contractual liability exclusion. However, other courts take the position that a contractual liability exclusion in a CGL policy will preclude coverage for liquidated delay damages, regardless of the cause of those delays.  

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Author and Editor Stu Richeson is an attorney in the litigation section of Phelps' New Orleans office, primarily focusing on commercial litigation with an emphasis on construction matters, intellectual property issues and insurance.